The need for cash, especially working capital, is an essential part of running a company or business. It does not matter how small or large the business is, there is a need for cash to run the day-to-day activities of the company. For this reason, business owners are always on the lookout for cost-saving loans to cover these costs.
It is extremely helpful if the aid has the best interest rates, and the best repayment plans, and can save the company money in the end. There are many different ways of obtaining such cash injection and one such way is through invoice factoring.
What is Invoice Factoring?
Most businesses have unpaid invoices. In most instances, these invoices are guaranteed assets. Hence, the business could use these invoices as a means to obtain a lump sum of cash from a reputable lender such as Booster Financial. The company – Booster Financial – would provide a business with a sum of money that could be equivalent to the invoices the business provides. The money is paid back through the paid invoices. That means that the repayments are recouped directly from the invoices. Simply put – one could say the customer pays the factoring company the installments each month. It creates a revolving credit line for the business to continue its operations.
The Difference Between Invoice Financing and Invoice Factoring
When the business opts for factoring financing:
It will, instead, use the invoices as collateral.
In this instance, the business remains in charge of the payments of the invoices.
With invoice factoring:
The factoring company will purchase the invoices from the business.
The factoring company takes control of the payments of the invoices.
How can Invoice Factoring Help a Business?
This is one of the easiest ways to access funds for the business. It is often difficult for small businesses to secure loans, and this is a way of getting the much-needed funds for the business. Invoice factoring can help the business in that the owner does not need to wait until the customer pays the invoice. The cash would be available upfront and the paid invoice settles the repayment. It assists the business in the following way:
It will help the business with the accounts receivable process. The factoring company will be in charge of collecting the payments for the invoices
The handling of the collections will be in professional hands, especially if it is a reputable company.
With this process in place, the business will grow its income as well as its reputation as a reputable business.
This will place the business in good standing to get approvals for future loans.
The business will have the necessary working capital to run its daily operations.
When would a Business need Invoice Factoring?
It is necessary to always assess the business finances. Ongoing audits of everyday operations would help the owner assess when it is necessary to opt for external financial assistance. All businesses need positive cash flow and this is one way of keeping a positive cash flow. Sometimes businesses can be influenced by the overall bad economy or when they experience slow production periods. In cases such as these businesses would need cash flow and have firm control over their finances. This would be an opportune time for businesses to opt for invoice factoring. It is the quickest way to ensure immediate cash flow based on the pending invoices of the business. It allows for the flow of cash before the customers pay the invoices. The business could put forward invoices that have 30-, 60-, or 90-day payment requirements. Instead of waiting on these payments, the factoring company would provide the cash upfront in lieu of the unpaid invoices. Invoice factoring is therefore ideal for businesses that need instant cash.
Who can help a Business with Invoice Factoring?
There are various options for a business to obtain cash for operational purposes. When the business is in no position to get loans through other means the best bet is to approach a factoring company. A business would often fail to secure a loan through a bank, for example, due to low credit scores. This is where a factoring company such as Booster Financial could be of service. A factoring company is a lending institution that will not extend a loan to businesses but instead purchase their invoices for them. These companies will assist businesses with the best advice as well as the best options for obtaining cash going forward. It is, therefore, important for any business to be honest and upfront with the company in order for them to best assist them.
What is the Cost of Invoice Factoring?
Factoring companies have two sets of rates: flat rates and variable fees. When the company charges a flat fee, it would normally charge a once-off fee upfront. With variable fees, the company would charge percentages of one to three percent on invoices that the customers do not pay. Advance rates could range between 60 to 90% depending on the industry type. This is often equated with the amount that the company holds in reserve until the customers pay the invoices. It is always advisable to get quotes from several factoring companies before making a commitment. The cost of factoring includes the following:
The cash is available immediately
The factoring company performs administrative duties in terms of collecting invoice payments.
The line of credit can help the business to better credit scores for future loans.
This is not a strict form of credit as it offers more flexibility. This means that, as the business grows, sales grow, and such invoices can be helpful to invoice factoring.
Importantly, invoice factoring does not add to the debt of the business.
How to Start the Invoice Factoring Process
The first step is to find and complete an online application form. This will aid in setting up an account for the business. The business needs to submit a few required documents:
An accounts receivable aging report
Articles of Incorporation
A list of its customers
This is for invoice factoring; hence, the most important aspect to submit is the invoices to factor. The factoring company needs these in order to evaluate the amount of cash to advance, or what the business needs. The period for the release of the funds is usually 24 hours. The factoring company includes all fees and rates. The factoring company will release 95% in a lump sum but will keep a reserve until the customers pay the invoices.
Once the process starts, the factoring company will take over the responsibility to collect the invoice payments. These payments are the payments already set in the invoices.
Once the customers pay the invoices, the factoring company will release the rest of the funds from the reserve.
What are the Positives and Negatives of Invoice Factoring
With any cash loan or external cash input, there are positives and negatives. The same applies to invoice factoring.
The business can have cash flow immediately. With immediate funding, the business can continue its services and production without missing a beat.
Because the invoices serve as part of the repayment agreement, the factoring company, such as Booster Financial can immediately see what the value of the cash advance could be, and immediately approve it. This means that the business can receive the exact amount needed at the time of application.
It is, therefore, one of the easiest ways to apply and receive cash for the business.
The business can spend the money on expanding the business instead of continuing to wait on payments from clients.
There is no paperwork such as with conventional and other loan types.
The business does not need a high credit score.
The rates and fees on invoice factoring are generally higher than that of other types of loans. The lender would calculate the rates and fees, based on the number and value of the invoices. However, the business needs to keep in mind that it can be expensive.
The business becomes liable for the outstanding amounts should clients not pay the invoices. This is known as recourse factoring.
Thus, if the customers do not pay the invoices it could also hurt the business credit score. This will affect future financing in a negative way.
It works best for businesses that work with others that utilize invoices as well. Hence, direct sales will not work for invoice factoring.
The possibility exists that the business does not have the option to choose which invoices they might want to offer up to the lender.
This means that the business does not have direct control over its incoming payments.
Furthermore, there is no guarantee that the factoring company will be successful in getting customers to pay even if it is a reputable company such as Booster Financial.
Where to use Invoice Factoring Cash
When opting for this type of external cash input, a business does not have limitations on how it would utilize the cash. It is important, however, the business should always keep a tight rein on how it spends the money. It is a security net for when there are downturns in the economy as well as when production might be low for the business. The business should, therefore, carefully assess its operations so that the money does not go wasted. It could also serve as a means of saving. Factoring funds could be used as working capital, employee payments, or expanding the business. It will assist with seasonal or cyclical low production rates. Most importantly, it will help with the collection of payments where customers are slow to pay.
Frequently Asked Questions
What is invoice factoring?
Simply put, the factoring company purchases invoices from businesses to supply them with much-needed cash flow to run the business smoothly.
What is a factoring company?
A factoring company is a company, such as Booster Financial, that specializes in providing businesses with cash injection based on unpaid invoices.
How do businesses pay back invoice factoring cash advances?
The factoring company would be in charge of collecting the payments on the invoices. In this way, the “loan” is paid back directly to the company
How can the business apply for invoice factoring?
Assess the needs the business has.
The business assesses its unpaid invoices and submits them to the factoring company.
The factoring company, in turn, assesses the value of the invoices and determines the cash advances.
The factoring company then recoups the invoice payments directly from the customers.
What recourse factoring?
The business is responsible to pay the unpaid invoice to the factoring company should the customer not pay the invoices within the recourse period.
Which businesses use invoice factoring?
Businesses that have standing invoicing as part of their payment schemes may use invoice factoring. It does not make sense when there are direct to cash payments. There needs to be a paper trail for the recouping of funds.
How does a business access invoice factoring?
The best way is to contact a reputable factoring company such as Booster Financial and start the process. The business can do this online.
What is needed to start the invoice factoring process?
Access the Booster Financial website
Complete the online application form
Provide an account receivable aging report
Articles of Incorporation
Provide a list of customers, and
All the invoices to factor
What is the FICO score?
All businesses and business owners have what is known as a credit score. The score indicates a healthy credit or is creditworthy. The numbers indicate creditworthiness and lenders use them to determine how much credit the borrower could qualify for. This is also known as the FICO score. A score higher than 530, indicates that the business or individual is creditworthy.
Can a business apply for invoice factoring with a low credit score?
This is ideal for businesses with low credit scores. The funding is not based on the business credit score but rather on the creditworthiness of the customer. It is especially ideal where the business does not qualify for a conventional bank or other loans.
Understand Your Options
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